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Today merger & acquisition are very common. In Indian Company Law Merger & Acquisition are governed by section 391-394 of the Companies Act, 1956. For this Hon’ble jurisdictional High court's permission has to be obtained for sanction of a petition for this purpose.

In any merger Swap ratio plays a very important role. It is universally recognized principal that valuation is not an exact science and that estimate values necessarily involves selecting a method or approach that is suitable for the purpose. In the valuation it is not the absolute values but the relatives which are of concern. 

Hon’ble Supreme Court in a landmark judgment in the case of Hindustan Lever Employees Union vs Hindustan Levers and others [(1995) 83 company cases 30] has laid down guiding principle for the valuation of shares. I am reproducing some useful observation of Hon’ble court in this regard:-

Court stated that some of all of the following factors will have to be taken into account in determining the final share exchange ratio:

(a) The Stock Exchange prices of the shares of the two companies before the commencement of negotiations or the announcement of the bid.

(b) The dividends presently paid on the shares of the two companies. It is often difficult to induce a shareholder, particularly an institution, to agree to a merger or a share-for- share bid if it involves a reduction in his dividend income.

(c) The relative growth prospects of the two companies;

(d) The cover (ratio of after-tax earnings to dividends paid during the year) for the present dividends of the two companies. The fact that the dividend of one company is better covered than that of the other is a factor which will have to be compensated for at least to some extent.

(e) In the case of equity shares, the relative gearing of the shares of the two companies. The 'gearing' of an ordinary share is the ratio bf borrowings to the equity capital.

(f) The values of the net assets of the two companies. Where the transaction is a thorough-going merger, this may be mere of a talking- point may be a matter of substance, since what are relevant are the relative values of the two undertakings as going concerns.

(g) The voting strength in the merged enterprise of the shareholders of the two companies.

(h) The past history of the prices of the shares of the two companies.

It will, therefore, appear that in case of amalgamation a combination of all or some of the methods of valuation may be adopted for the purpose of fixation of the exchange ratio of the shares of the two companies. It is to be noted that even in such a situation, the book value method has been described as 'more of talking-point than a matter of substance'.

This judgment is very useful for practical purpose. And definitely a guiding factor for valuation of shares.


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